Multistate Tax System

Towards a MultiState/Territories Tax Commission for Australia

Introduction

Federalism is no doubt a wonderful thing in many respects except, that is, when it generates a complex web of State and Territory taxes which serve no useful purpose beyond enabling States and Territories to engage in some sort of fiscal competition, a sort of “mine is smaller than yours” mentality, while playing lip service to co-operation.

Consistent with its aims and areas of research, ELRI has identified two major problems in Australia’s tax system:

  • the lack of standardisation of State and Territories tax laws; and
  • the lack of a central administration of those laws.

These problems are:

  • adding to the costs of doing business in Australia;
  • making Australia less attractive to overseas investors;
  • affecting Australia’s international competitiveness in trade;
  • adversely affecting Australia’s GDP;
  • undermining budget efficiencies for the States and Territories.

The solution lies in:

  • implementing the formation of an entity similar to the MultiState Tax Commission (MTC) in the US to achieve a co-operative, shared responsibility for the administration of those taxes, particularly a one stop shop system;
  • move to standard tax legislation under the guidance of that new entity.

Present system

1. Problems

What can be the reaction of potential overseas investors spurred on by the rhetoric of the benefits of globalisation when the morass of State and Territory tax legislation dawns upon them? What can be the reaction of fund managers trying to take over a unit trust and having to grapple with whether it is “public” or “private” or trying to buy out a property development company and having to go through the labyrinth of definitions, of thresholds and discovering that all this is not the same in all parts of Australia? What can be the reaction of a CEO trying to streamline an Australia wide group to boost turn over when the array of reconstruction provisions is explained? What can be the reaction of a purchaser of an Australian business when a simple thing like complying with different lodgement requirements of each of the States and Territories has to be confronted with its the associated cost? What can be the reaction of an employer told that there has been “harmonisation” of payroll taxes who then finds out that the meaning of “taxable wages’ is not the same everywhere? Or, that there is no harmony between the payroll tax regime and worker’s compensation? How does a company doing business in several parts of this country feel when having gone through a payroll tax audit at great expense, it has to front up to another and another in different States or Territories and do it again? And how does an overseas investor see Australia from a land tax perspective when land tax is just as different as the other taxes and is confronted with the prospect of multiple filings?

It may be legitimate for the States and Territories to enact the laws for which each considers it has an electoral mandate and to regulate the conduct of their communities. But is it legitimate in this new age of globalisation and international competition for them to design their taxes and to draft their tax legislation when the result is a contortion of otherwise straight forward commercial transactions, an imperative to dissect up to eight pieces of significantly different tax legislation and to deal with different taxing authorities within different time frames?

In the contest between competitive federalism v. co-operative federalism, has anyone given any thought to the resultant burgeoning and burdensome compliance costs to Australian business and the inevitable impost on this country’s international competitiveness. Or, to the inefficiencies of State/Territory administration costs and, importantly, to their tax take? Or, more importantly, to the effect on our GDP? Is it really right that there are eight sets of State and Territory tax regimes for 24 million people? Surely, in this, we are over regulated.


2. Examples of the problems: Technical

Stamp duties

The following is, sadly, but a snapshot of the problem so far as stamp duties are concerned:

Buying assets of an Australia wide business: you have to look at all of the States and Territories to find out what assets will be subject to duty. Sometimes stock, debtors, plant, goodwill are included and sometimes they’re not and sometimes they will be when sold with others things; you have to watch out if you assume that the definitions are the same and you have to watch out for the differing lodgement requirements because the penalties can be severe; you have to deal with different authorities, there is no one stop shop and the cost and time to ensure compliance is often several times over the duty you end up paying;

Buying shares in a company holding land Australia wide: you have to be careful that you don’t assume that marketable security duty has gone in all the States and Territories and even if you remember that, you have to be very careful to consider whether the relevant company is “landrich” or not or is a “landholder” or not; but then what is “landrich” and what is a “landholder”? The threshold tests for when a company is “landrich” or a “landholder”, for when an acquisition is triggered, of what is “land” and what is not, the definitions, the tracing provisions, the aggregation provisions, the exemptions and much more may not the same and differing and difficult valuations issues can arise adding complexity and cost to the final bill for the deal;

Buying units in a unit trust holding land and non-land assets Australia wide: you have to be on guard for any distinction the relevant State or Territory may draw between “public” and “private”, whether the trust although being public is in any event a “land holding trust” and therefore not “public”, you have to be aware of the differing acquisition thresholds, whether the trust is listed or not, you have to be aware of complex tracing provisions and difficult valuations issues can arise, and as always, the labyrinth of definitions to support the tax design is bewildering;

Restructuring a company or trust group carrying on a business or holding land and non-land assets Australia wide: you have to weave your way through the maze of the corporate reconstruction provisions where they exist which may or may not permit trusts to benefit and if they do then often to a lesser extent than companies; some require pre-association tests of differing periods, some have post-association tests and some don’t, some have exemptions and some don’t, some allow liquidations or public floats as exemptions and some don’t, and again, the labyrinth of definitions to support the tax design is bewildering;

Setting up an Australia wide business: you have to be aware when assets in various parts of Australia are acquired that there are an array of “dutiable transactions” and “dutiable property” and in some parts something may be dutiable or may not depending on what other property is acquired and the type of transaction involved; there can be different outcomes depending on fine distinctions between a transaction and what’s in a document, exemptions are not consistent and in many parts just what the particular exemption covers is often hard to fathom, some depending on a Commissioner’s satisfaction about something and others not; and again, you have to watch out for the differing lodgement requirements because the penalties can be severe, you have to deal with different authorities, there is no one stop shop, no system of administrative co-operation between the various authorities to streamline compliance and tax collection;

Funding a business for its Australia wide operations: you have to remember that mortgage duty has not gone from all parts of Australia; if you do, then you may not cost a project correctly, and again, the failure to account for that duty in the appropriate jurisdiction may render you liable for severe penalties;

Intergovernmental Agreement: then there is also still unlisted marketable security duty in some parts of Australia; the road to standardisation of the tax base keeps being diverted and hence creates uncertainty for business and resultant cost, a cost which has to come out somewhere.

Payroll Tax

Payroll tax harmonisation has achieved some consistency but not standardisation and the business community will assume consistency across the jurisdictions at its peril. But, again, the following is, sadly, but a snapshot of the problem so far as payroll tax is concerned:

Determining the taxable wages: you have to be careful to understand the differences in “taxable wages” in areas such as apprentice/trainees wages, long service leave and redundancy payments, fringe benefits and paid parental leave;

Lodging returns: you have to remember that the Northern Territory has a different requirement for monthly returns compared to the other jurisdictions;

Exemptions: you have to apply to each jurisdiction to obtain an exemption such as a charity, at a cost which such organisations can ill afford and then you may get the exemption in all but one jurisdiction;

Rulings: although there has been some agreement between the jurisdictions on rulings, other rulings are State/Territory specific requiring care in compliance attempts;

Grouping: you have to consider applications to each relevant jurisdiction where grouping exclusions are relevant, a potentially highly costly and time consuming process;

Interface with worker’s compensation legislation: risky is the company which thinks that there is any symmetry between the impact of payroll tax and worker’s compensation: it can be the case that, for payroll tax purposes, one State is the correct jurisdiction but, for worker’s compensation, another is the right jurisdiction; and where a company does business in more than one State, such as a mining drilling company, the resulting complexity is multiplied.

Land Tax

Land tax also still presents as a maze for the unwary. Again, the following is, sadly, but a snapshot of the problem so far as land taxes are concerned:

What land is liable: you have to remember that, in some States and Territories, land tax is levied on all land but, in the ACT, it is not levied on commercial land and is not levied at all in the NT;

Exemptions: you have to realise that the available exemptions vary across the jurisdictions;

Grouping: in some jurisdictions, corporations are grouped but in others they are not;

Thresholds: thresholds apply in most but all jurisdictions;


3. Examples of the problem: Administration

Each of the jurisdictions has its own Office of State/Territory Revenue with everything that goes with it: separate administration, separate IT systems, separate compliance systems, separate appeals systems to name a few. Each has to be approached separately when more than one jurisdiction is or even may be involved. And there is:

No one stop shop for filing: documents or returns have to made to each where relevant;

No central auditing: you can finish a long and expensive audit for one jurisdiction only to have to cover the same ground again for another and for another;

No central education entity: this means that particular approaches and therefore assessments to important issues are different;

No central rulings entity: this means that there is again no common agreed approach to important issues;

No centres of technical expertise: this means that there is repetition of attempts to get technical experts;

No single website: taxpayers have to navigate around websites which are not standard and hence confusing;

No central help line for taxpayers: taxpayers are confronted with a fundamentally different approach and have to waste time contacting several in many cross jurisdictional transactions;

No common approach to tax design and drafting: this can result in taxpayer confusion in trying to comply with their statutory obligations and cost in seeking expert advice.


4. Result: Costs to the community – taxpayers, tax gatherers, the economy and Australia’s international position.

The costs to the community occur at both the personal, institutional and economy wide levels and are driven by unnecessary duplication which in turn fuels both additional compliance costs but also produces uncertainty and eventually leads to inaction on the part of business. The impact on Australia’s international competiveness as a destination for international investment should also not be underestimated. In an increasingly volatile international investment market, small additions to the costs of doing business, as exemplified by unnecessary duplication costs, can be highly damaging.


5. Solution

The solution lies in adopting an entity similar to that which has operated in the US since 1967, the MultiState Tax Commission.

In Australia, this would require the States and Territories agreeing, with the “help” (co-operatively if possible, coercively if necessary) of the Australian Government, that:

  • major State and Territory tax legislation (duties, payroll and land tax) should be standardised in their tax design so that the tax bases are the same and the legislation is the same;
  • there should be a shared responsibility for the administration of those taxes, particularly a one stop shop system.
    The States and Territories can be left to set their own rates and thresholds as appropriate.

This approach may require some degree of give and take by the States and Territories, some agreement, some formula to effect an adjustment between them because standardised tax legislation would no doubt be said by some to produce different revenue collections for different States and Territories. But any resultant loss of revenue could be accommodated in this era and within the spirit of co-operative federalism. No longer can the “Not in my State/Territory” argument or the “It will be a disaster for this State’s/Territories’ tax take” argument be allowed to postpone genuine tax reform for the State and Territories. This approach may also require that there should be no segmentation of Australia wide assets or businesses with the complexity that involves. The additional costs imposed by these taxation compliance issues places an unnecessary and eventually unsustainable burden on Australia’s international competitiveness.

The Economics & Law Research Institute (which is associated with The Monitor) looks at this issue in detail: see “Towards a MultiState/Territories Tax Commission for Australia“.